What Is SEIS and EIS Tax Relief?
Everyone understands that equity investment can be risky. But at the same time, there are tax reliefs available that can mitigate – or even eliminate – the risk of losing your money. In this post, accountants Chiene + Tait walk through the lucrative tax reliefs that might be available for investors who make equity investments into companies.
Seed Enterprise Investment Scheme (SEIS)
SEIS has been described as “the world’s most generous scheme for investors”. It is a relatively new UK government initiative, for investment into new and small companies, following on from the long established EIS tax relief scheme (more on that below).
In a nutshell, this scheme is designed to motivate investors to invest for shares in new companies. The government mitigates investors’ financial risks by providing lucrative tax reliefs. In fact, these reliefs are so generous that, for the right investor, the financial risk can be eliminated altogether. There are complex qualifying requirements for both the company and the investor, but this post focuses on the benefits.
SEIS provides investors with:
- 50% Income Tax relief on their investment in qualifying companies.
In simple terms, if you invest £100,000, you will get £50,000 of income tax relief back from HMRC. Note – you have to have paid at least this much income tax to be repaid it.
- 28% Capital Gains Tax re-investment relief is also available.
Again, in simple terms, by investing the same £100,000, you will also save £28,000 of capital gains tax if you were due to pay this on, say, the sale of a second home. Note – this is only available for investments made during the 2013/14 tax year that have been treated as made in the 2012/13 tax year – thereafter, only half of a £100,000 gain is exempt
- No Capital Gains Tax on a profitable sale of the shares after at least 3 years, or further Income Tax relief if the company fails.
SEIS Relief: An Example
- Invest £100K in an SEIS-qualifying company = £100,000
- Income Tax relief (elect to treat as 2012/13) = (£50,000)
- CGT exemption (on £100K gain) = (£28,000)
- Cost of Investment = £22,000
Sell for a gain after 3 years – keep the profit tax-free! But if the company fails (say, next year):-
- Income Tax relief (2014/15) = (£22,500)
- (£100,000 invested – £50,000 SEIS) * 45% tax rate
- Total Cost / (Profit) of Investment = (£500)
A company’s SEIS investment limit is £150,000 less any de minimis state aid it has received in the last 3 years. Once the company has spent at least 70% of SEIS funds received, it can accept further EIS funds.
Enterprise Investment Scheme (EIS)
EIS has been established as the most common means of investment for investors for many years. This scheme is also designed to motivate investors to invest for shares. However, the advent of SEIS means that EIS is more commonly used for larger investments in slightly older and/or larger companies and/or ‘follow-on’ investments into companies which have already received SEIS funding. The reliefs are certainly attractive, but not as lucrative as those on offer to SEIS investors.
- 30% Income Tax relief on their investment in qualifying companies.
In simple terms, if you invest £100,000, you will get £30,000 of income tax relief back from HMRC. Note – you have to have paid at least this much income tax to be repaid it; and
- Capital Gains Tax deferral relief is also available.
Again, in simple terms, if you invest the same £100,000, you will also defer paying £28,000 of capital gains tax until you sell the shares (or can reinvest at that point and ‘redefer’ the original gain); and
- No Capital Gains Tax on a profitable sale of the shares after at least 3 years; or further Income Tax relief if the company fails.
EIS Relief: An Example
- Invest £100K in an EIS-qualifying company = £100,000
- Income Tax relief (2012/13) = (£30,000)
- Cost of Investment = £70,000
Sell for a gain – keep the profit tax-free! But if the company fails (say, next year):-
- Income Tax relief (2014/15) = (£31,500)
- (£100,000 invested – £30,000 EIS) * 45% tax rate
- Total Cost / (Profit) of Investment = £38,500
ShareIn have an alliance with Chiene + Tait, an experienced and dynamic firm of accountants with offices in Edinburgh and London. Chiene + Tait have structured many investments to receive both SEIS and EIS funds, ensuring that the investors receive the maximum reliefs available to them and the company is more investable. In addition, we have a highly successful advance assurance rate with HMRC.